Cost cutting may be the order of the day, but technology companies have to carefully balance their need for short-term profits with the need for investment in innovation. So FSN contributing editor, Lesley Meall, finds out where software developers are focusing their R&D spend, and why.
Investing in innovation
The world’s richest business mogul knows a thing or two about technology, and its potential for change. So when Bill Gates spoke at the annual Microsoft CEO Summit (in May 2009) he was uniquely well placed to put a positive spin on the recession and how technology can pull us out of it. ‘The opportunities for innovation are stronger today than ever before,’ he told an audience including the billionaire investor Warren Buffett, News Corp chairman Rupert Murdoch, and Amazon.chief executive Jeff Bezos.
‘The drug companies will get back in high productivity mode,’ predicted Gates, and we have so far only glimpsed the possibilities offered by the information technology industry. ‘What we can do for education, communication, and what that looks like for the efficiencies of world markets, we are just at the beginning of that,’ he added, and Microsoft’s CEO is equally upbeat. ‘Innovation is going to proceed just as rapidly,’ asserts Steve Ballmer, because despite lack of available capital in many businesses, ‘good propositions are still going to get funded.’
Clearly, this is not a universal truth. Cost cutting is the order of the day for many organisations, and given a stark choice between investing in development or keeping the business going for another six months, few would choose the former. But technology companies have to take more care than most to maintain the right balance between the need for short-term profitability and the need for investment in innovation. ‘I don't know anybody in our industry actually who's cutting their research and development budget,’ says Ballmer, including Microsoft.
Retaining its $9bn R&D budget for this fical year has forced Microsoft into some careful compromises and difficult judgement calls. It has layed-off 5,000 staff since the start of 2009, but it has plans to recruit in some of its most high-growth areas, and it also bought the boutique games studio BigPark. Cisco, Dell, IBM, MySpace, Palm, SAP, Sony Ericsson and Hewlett Packard are just a few of the high-tech luminaries having to make similarly unwelcome and unpleasant decisions – well, they’re definitely laying-off staff.
From here to there
Along with Hewlett Packard’s second quarter results in May the tech giant announed its intention to lay-off 6,400 workers (2 per cent of its global staff) during 2009, but it has no intention of letting this get in the way of innovation. ‘R&D is the pipeline for future growth of the company,’ asserts HP Labs director Prith Banerjee. ‘The key is to invest in innovation that truly matters,’ he says, explaining: ‘We are looking at investment in technology for the long term so that HP is fully prepared to provide its customers with a variety of choices when we get out of the recession.’
This perspective is mirrored by smaller technology companies. ‘We are looking towards the end of the recession as an opportunity,’ says Mark Thompson, CEO of COA Solutions, the supplier of business accounting and management software and information systems. ‘We have more products being released this year than during the past four years,’ he says, such as the Employee Engagement module it added to its People Analytics, business intelligence HR solution in March, and the on-demand HR and payroll service it launched in May – which were both well-timed, to help organisations address the need for efficiencies.
‘With COA Solutions On Demand, organisations of all sizes can eliminate the time and costs associated with HR and payroll administration,’ explains Thompson, ‘and this allows staff to concentrate on value-adding activities, which is critical during challenging economic times.’ The on demand approach makes it easier for organisations to manage their cash flow and minimise their costs, because whether they want to use the service just to print their payslips, or require fully hosted HR and payroll, solutions are available at a fixed monthly price.
There are more new products and services in the pipeline for 2009 and beyond, and despite economic pressure COA has no plans to reduce its investment in future development. ‘We are actually spending 10 per cent more this year on research and development,’ reports Thompson, as COA is gearing up for a changing marketplace. ‘I think that there will be a lot less suppliers in our sector coming out of the recession than going into it,’ he predicts, ‘and we want to be positioned to take advantage of this.’
From on-premise to on-demand
The on-demand accounting vendor e-conomic also views the recession as a chance to expand its user base. ‘We are a softare company that wants to take on the world,’ says Torben Frigaard Rasmussen, CEO of e-conomic International. The Danish company has built its success on its innovative online approach not just to software delivery, but also support. ‘We make a lot of self-help tools available online to users of e-conomic,’ he explains, and use Web 2.0 tools such as blogs to communicate and interact with our users. ‘I know it’s not easy, but we want to make accounting and bookkeeping more fun,’ he adds.
Maybe this is working, because during the past two years e-conomic has grown at an annual rate of 60 per cent, and it is anticipating growth of 40 per cent in the year ahead; all of which has helped the company to stay self-funding and continue to develop both its product and its international footprint. ‘We are at the forefront of a major change in the way businesses and accountants use accountancy software,’ says Rasmussen, and he expects the on-demand trend to continue. ‘I think we’ll see steady growth in the countries we’ve gone into,’ predicts the CEO, adding: ‘I see 2009 and 2010 as a period of opportunity.’
Jerry Rihll, the managing director of Digita, also sees the economic downturn as an opportunity that is best met by investing in innovation. ‘I am building a business for the future,’ he says, and since the developer of consumer and corporate taxation products was acquired in 2008 by the Thomson Corporation, it has increased the investment in its people and the development of future products. ‘Around 65 per cent of our staff are involved in software development,’ he says, adding: ‘The company is all about R&D,’ and it always has been. So later this year it will be releasing a number of new products including time and fees and a document management system.
It has also been ‘optimising’ its existing product range. As a boutique software company, Digita clients tended, historically, to be sole practitioners and small firms, but during the past year it has been scaling up in terms of its client and its products. ‘Having a Big Four client has encouraged us to put a lot of R&D effort into enhancing the software so that it reflects their needs,’ says Rihll, and fully exploits the sort of infrastructure that larger clients typically have in place. ‘We are putting all of the pieces in place,’ he adds, ‘so that we can show leadsership in product innovation and strategy.’
From strength to strength
This is an area where the mid-market palyer Access Accounting has also been busy. ‘We have centralised our organisational structure and its systems, and we are elevating the brand,’ says CEO Alistair O’Reilly, ‘getting ready to take on the likes of SAP and Microsoft’ – even if this will be only in the UK markeplace. By the time you read this, the company will have changed its name to Access and repositioned itself as a consulting company that provides software for document management, procurement and workflow as well as horizontal solutions.
From the outside, it may look as if the company is rationalising to save costs – particularly as it has recently made some of its staff redundant – but O’Reilly sees things a little differently. ‘The staff lay-offs happened in finance because of the duplication created by the centralisation of invoicing and credit control,’ he says, but the rationalisation process is the result of almost two years planning, and says more about the company’s approach to running a tight ship than it does about the credit crunch.
‘We invest from retained revenue and run the business out of positive cashflow,’ says O’Reilly, so it is not highly leveraged; but it does want to make the very best use of its strengths. ‘We have taken out costs to protect cash flow and the professionalism of the business going forward,’ he explains, and in common with many other technology companiest, Access is still investing in product development. ‘The company continues to invest in R&D,’ says O’Reilly, which will result in new products and enhancements to existing products during 2009.
‘Economic hard times can offer a lot of opportunities for companies like us,’ says O’Reilly, because a lot of companies are streamlining and automating their processes, and it is also using its robust financial health as the basis for expansion. Because Access has eschewed the external investment route to expansion (which is now proving so painful for some other UK software companies), it can take advantage of the credit crunch. ‘We have our sights set on a number of potential acquisitions,’ says the CEO, adding: ‘We are looking at opportunities as we speak.’
